80. You said the tax credit system was the biggest
change ever to hit you. What is the total cost to the Department
of setting up and administering this new system?
(Sir Nicholas Montagu) Dave can tell you the cost
of new tax credits. I certainly do not have a figure to hand,
though I could probably produce one, for tax credits as a whole.
(Mr Hartnett) For new tax credits over a four-year
period the figure is about £1 billion.

81. The cost of administering it.
(Mr Hartnett) In staff, in computers and everything
else which goes with setting up something new.

82. Would that be a similar figure, would that
be a good estimate for what it has cost so far?
(Mr Hartnett) No; new tax credits, for example, has
a computer system which is eight times bigger, more complicated
or whatever, than for self-assessment. It is a much more significant
structure than working families' tax credit where we were actually
able to build, in part at least, on the computer systems which
came to us with the Family Credit Unit which became the Tax Credit
Office.
(Sir Nicholas Montagu) On a procedural point, just
to avoid my having to send you a note, may I say that I have been
characteristically modest. The Committee will have noted that
I said five times; Dave is undoubtedly right when he says eight
times.

83. Although the Chancellor does not accept
that it is a form of social security benefit, would you agree
that the kind of compliance checks you have to run are rather
like the old DSS used to run?
(Sir Nicholas Montagu) No, I do not think I would.
I have indicated in reply to an earlier question that the Department
of Social Security, now the Department for Work and Pensions,
does not apply the kind of risk based approach that we are applying
to tax credits. What we are trying to do, and obviously we shall
be talking with DWP and picking their brains as well, is to apply
the sort of compliance approach that we have found works well
for tax to new tax credits. Dave, with his sponsoring responsibility,
may want to add to that answer.
(Mr Hartnett) There are three stages to this. There
was the compliance regime which existed for benefits before tax
credits were introduced. Some new things have come with tax credits.
Nick mentioned one of the most important, which is risk assessment.
There is also a progressive compliance response now. In the past
it was essential for what is now DWP to consider prosecution in
order to make recoveries. We do not have to prove debt now, we
can use something like a tax assessment to recover money where
we have to recover money.

84. The Department of Social Security, or indeed
the Department for Work and Pensions now, has to be fairly intrusive
into people's family circumstances and arrangements. Are you finding,
because you are now administering tax credits, that you are having
to undertake that kind of intrusive work which perhaps previously
you did not have to do?
(Sir Nicholas Montagu) It is not entirely new to us.
Although independent taxation has been in for some time, a lot
of our work has turned on households. For example, when an additional
personal allowance was paid to a single parent, we needed to be
sure that the person claiming that allowance was not living with
somebody as a partner. There are new elements to it, but it is
not as new as you might think.

85. It says in this report that you do cross-checks
with the Department for Work and Pensions and the data they hold,
"where appropriate" is the phrase used in the report.
Is it not always appropriate? Often the people you will be dealing
with will also be claiming other forms of benefit.
(Sir Nicholas Montagu) No, it will not always be appropriate.
Our basic check is that the person says they are who they are.
We then apply a risk assessment. With new tax credits, much of
this will be done within the system. If there is an indication
that somebody is a risk, then we would cross-check with our own
data, for example, with the data warehouse to check on households,
we would cross-check with the Department for Work and Pensions.
With something like this, whether it is a social security benefit
or whether it is a reduction in the tax bill, there is obviously
a balance to be struck between proper and rigorous compliance
and making it easy to claim.

86. You are talking about risk assessment. It
says in paragraph 3.17 on page R14, ". . . 49,000 cases have
been referred to the Compliance Co-ordination Unit" since
October 1999. However, limited additional checking allowed you
to eliminate a further 22,500. The view here is that your risk
approach, particularly your risk scorecard, was basically a complete
waste of time.
(Sir Nicholas Montagu) That is not wholly fair.

87. When you suspended it at 22,500 there was
absolutely no impact whatsoever on the effectiveness of your activity.
(Sir Nicholas Montagu) Yes, but bear in mind that
a major purpose of the risk scorecard was to get staff administering
this new system used to doing the analysis of it. By the time
we discontinued it, it would have been second nature to many of
them. I am not saying it was perfect; clearly it was not. That
is why, iteratively, we concentrated on improving the risk scorecard
and re-introducing it. As I indicated to the Committee on previous
occasions, what we try to do with the whole spectrum of our compliance
activity, is constantly to refine our indicators and our analysis
of risk.

88. You further decided that of the remaining
26,500 cases you accepted for inquiry, you would not pursue 3,600
of those. The truth is that you are not pursuing a huge number
of these cases, are you?
(Sir Nicholas Montagu) We are not pursuing them for
the sake of pursuing them, certainly. We identify the cases that
we think call for further investigation. If they do, we have quite
a lot of specialists working on this in tax credits, we then decide
whether it should be what we call an aspect inquiry or a more
comprehensive one. If there is only one point which needs to be
checked up, this is probably done most effectively on the phone
from the tax credits office. If more looks wrong, or if there
are certain factors present like the claimant having an undeclared
partner or self-employed earnings being involved, then we will
undertake a full inquiry with the local compliance teams.

89. Your inquiries take so long that by the
time you have completed them you find it very difficult to recover
any overpayment you have given because by then you cannot recover
it against the current award they have been given.
(Sir Nicholas Montagu) That is not wholly fair. The
length of time for the inquiry looks longer than it actually is.
The time is measured from when it first reaches the relevant compliance
section. We conduct these inquiries in accordance with the code
of practice that we use for other areas of our business. People
must be given time to make their representations to us. As Dave
has indicated, if we find that people have had more credits than
they are due, we have a number of different mechanisms which we
can use to recover that money and we shall use them.

90. In paragraph 3.21 it says, "Delay between
an award being made and a decision being taken to recover an overpayment
creates a risk that an erroneous award will have expired by the
time the need for recovery has been established . . . These may
not be easily recovered and in some cases may prove irrecoverable".
If you speeded up the time you took to investigate these things,
then it would be much easier to recover the money, would it not?
(Sir Nicholas Montagu) I can totally understand your
worry. I hope I can reassure you. The amounts written off from
overpayments are pretty small. The specialist debt recovery group
remitted under 1 per cent of the amounts sent for recovery in
2000-01. That amounts to under £35,000. Against some of the
background we are talking about, that is peanuts.

91. May I move on to a point Mr Davies made
before he left, which I found extraordinary? You have no idea
what the total number of eligible people is for these tax credits.
(Sir Nicholas Montagu) How can we without knowing
what numbers in the population are earning below or have income
from self-employment below the appropriate threshold? That is
why we need to set off the numbers claiming against the Family
Resources Survey.

92. When the Chancellor of the Exchequer is
setting his budget, presumably someone must come to him, maybe
in the Treasury as opposed to your Department, and say they think
it is going to cost roughly X. They must have some estimate for
the total number of eligible people or the take-up.
(Sir Nicholas Montagu) We would have an estimate.

93. What is the estimate.
(Sir Nicholas Montagu) Ministers have talked with
the present credits in terms of expecting a take-up in the region
of 1.4 million; we are at 1.33 million.

94. Take-up is not quite the same as total of
eligible people.
(Sir Nicholas Montagu) As you know, Ministers are
congenitally optimistic. I would have thought that represented
a fair view of the number they thought was eligible. I really
cannot give you a reply of the precision you would expect until
we have compared take-up with the Family Resources Survey.

95. You have been administering these tax credits
since October 1999. Your Family Resources Survey must have taken
two or three years to compile.
(Sir Nicholas Montagu) This is the 2000-01 survey
relating to the accounts on which I am being examined.

96. So you have had previous surveys.
(Sir Nicholas Montagu) Yes, but remember we are talking
about a system which came in at the end of 1999 and with payment
via the employer from 2000. In other words, we are talking about
the first full year of the system as reflected in these accounts.

97. It seems striking that when you heard you
were going to take over this system or set up this system, which
was when the Chancellor first announced it in 1998, you did not
say you had better conduct some surveys to see the likely household
expenditure and household incomes of the people you were going
to be dealing with, instead of waiting until 2002, to do this
survey in advance.
(Sir Nicholas Montagu) I have to give you a `not-me-guv'
answer there. The Family Resources Survey comes within the responsibility
of the Department for Work and Pensions.

98. You could have got onto the phone to the
Permanent Secretary there. I am sure you are good mates. You could
have said it would be very useful to have one of these surveys.
(Sir Nicholas Montagu) We are very good mates. I am
sure that you, like me, have experienced the sort of reaction
that Rachel Lomax, for whom I have the highest regard, can give
to unwelcome suggestions whether from this Committee or from one
of her fellow Permanent Secretaries.

99. Why would it be an unwelcome suggestion,
apart from the fact that you have taken over half her empire?
(Sir Nicholas Montagu) It would require her to do
the job twice, and these things cost money.